Question

Q1a) For which of these cash flow series is it necessary to calculate MIRR? SERIES 1 CF0 = -1050 CF1 = 450 CF2 = 600 CF3 800 SERIES 2 CF0 = 1200 CF1 = -500 CF2 = 700 CF3 = -1000 Using a required rate of return of 12%, calculate the MIRR for the series you chose b) Calculate the discounted payback period for the CF sefies you DIDN'T chose in Part A

Answer 1

MIRR is required where the cashflows change sign more than once

In Series 1 , the cashflows change sign only once, whereas in Series 2 , they change sign 3 times,

So, MIRR is required in Series 2

PV of Cashoutflows = 500/1.12+1000/1.12^3 = 1158.21

FV of Inflows = 1200*1.12^3 + 700*1.12 = 2469.91

So, MIRR = (FV of Inflows/ PV of Outflows)^(1/3)-1

=(2469.91/1158.21)^(1/3) -1

=0.2872 or 28.72%

Calculations for discounted payback period is as shown below

Year	CF	Discounted CF	Cumulative Discounted CF
0	-1050	-1050	-1050
1	450	401.785714	-648.2142857
2	600	478.316327	-169.8979592
3	800	569.424198	399.5262391

So, assuming evenly distributed cashflows

Discounted payback period = 2+ 169.8979/569. 4241 = 2.2983 years

(NOTE: If cashflows occur at end of year, Discounted payback period = 3 years)